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Abstract

The ongoing discussion whether the financial crisis was followed by a balance-of-payment crisis or a fiscal crisis reached its temporary peak with the debate on settlements of intra-Eurosystem payments via TARGET2. Looking at current account adjustments after the crisis, there has been a considerable decrease of private capital inflows into countries that are pegged to the Euro and Euro area member countries. In fact, private capital was replaced by public capital in EMU countries maintaining current account deficits. We estimate a small open economy model with nominal wage and price rigidities using 2003Q1-2015Q4 data for the group of Greece, Ireland, Portugal (EMU peripheral countries) and the group of Bulgaria, Estonia, Lithuania, and Latvia in order to analyze the differences in the adjustment process. We find that intra-Eurosystem payments helped to maintain output, consumption and investment on a relative high level during the financial crisis. The group of countries pegged to the Euro during the crisis experienced a sharp decline in the respective variables during and a quick adjustment in the aftermath of the financial crisis, accompanied by a stable level of government debt. Our analysis further determines TFP and risk premium shocks as main drivers of the endogenous variables. Additionally, EMU member countries suffer from consumption shocks, whereas countries outside Euro are more exposed to credit constraint shocks. The findings support the significance of sudden stops for countries pegged to the Euro as well as the dependence of EMU peripheral countries from intra-Eurosystem payments.